Key Takeaways

• SBA valuations must reflect fair market value of the business on a stand-alone basis—no synergies, no combined results, no optimistic “future growth” layered in.
• Historical, normalized cash flow—not projections—determines whether the business can support the acquisition debt.
• DSCR and repayment ability remain the SBA’s ultimate pass/fail test.
• Sale price and valuation are not the same. The SBA finances value, not optimism.

In SBA transactions, there’s plenty of talk about valuation reports, projections, financing structures, and buyer strength. All play a role—but none of them ultimately determine whether a deal gets approved.

The central test never changes:

Does the business, as it exists today, generate enough cash flow to justify the purchase price?

Even though some lenders may review buyer projections or consider the financial profile of an acquiring entity, the valuation itself must reflect the fair market value (FMV) of the stand-alone business—without synergies, without combined financials, and without speculative lifts in performance.

This is where many SBA deals fall apart. Here’s why.

Valuations Can’t Use Synergies—SBA or Otherwise

Under USPAP, NACVA standards, and Revenue Ruling 59-60, valuations prepared for SBA transactions must follow FMV principles. That means:

• The buyer and seller are hypothetical.
• No deal-specific synergies may be included.
• No strategic premiums or vertical integration benefits.
• No combining buyer financials with seller performance.
• No “we’ll grow it 30% next year” arguments baked into the valuation.

Projections may help a lender’s overall credit decision, but they cannot inflate the valuation conclusion. The valuation must answer a single question: what is the business worth on a stand-alone, as-is basis?

And the answer must be grounded in the company’s own historical cash flow—not buyer-dependent improvements.

What the SBA Actually Cares About: Cash Flow Stability

Even if projections are considered in underwriting, repayment ability must still be anchored in historical performance. The SBA’s SOP requires lenders to ensure the business can service its debt from ongoing operations—not from hoped-for efficiencies or future integration.

Lenders will evaluate:

• Buyer experience
• Buyer liquidity
• Existing business performance
• Reasonable, well-supported projections

But none of these can rescue a deal where the target company’s cash flow cannot support the price.

Debt Service Coverage Ratio (DSCR) Should Have the Final Say

At its core, SBA financing depends on one requirement: Historical (and normalized) cash flow must support the acquisition debt.

Most lenders target DSCR of 1.15x or higher, after accounting for:

• Replacement owner salary
• Normalization adjustments
• Rent adjustments
• Working capital needs
• All acquisition-related debt

Even with strong projections or a financially solid buyer, SBA lenders cannot finance above the valuation amount.

Normalization Determines Reality

A seller may claim “$600k SDE,” but a real valuation adjusts the numbers to market reality:

• Reasonable owner compensation
• Removal of one-time income/expenses
• Reversal of non-recurring tax benefits
• Rent and facility adjustments
• Assessment of customer concentration risk

After normalization, actual cash flow may land closer to $350k–$400k.

That number—not broker-quoted or seller-reported SDE—is what determines the supportable purchase price.

Final Thought: Price vs. Value

A sale price is not the same as value.

The SBA finances transactions based on Fair Market Value, not on what a specific buyer wants to pay or what a seller hopes to receive. For buyers, sellers, brokers, and lenders, the surest way to avoid last-minute closing issues is to ground your deal in a defensible, SBA-compliant valuation.

Connect with BGH Valuation to review your numbers, validate your price, and avoid preventable surprises.

FAQs

Why can’t SBA valuations include synergies or strategic benefits?

SBA valuations must follow FMV standards, which require analysis of the business as if sold between hypothetical parties. Deal-specific synergies artificially inflate value and are not allowed.

Can a synergistic buyer pay more than the appraised FMV?

Yes. A synergistic or strategic buyer may justify a higher price to themselves because of unique cost savings, integration opportunities, or cross-selling benefits.

However, the SBA can finance only up to the concluded FMV.

If the purchase price exceeds FMV, the SBA rules simply require more equity injection from the buyer to bridge the difference. The lender cannot increase the loan amount based on strategic value.

Do buyer projections matter at all in SBA deals?

Buyer-specific projections may be considered for the lender’s internal credit review, but they cannot be used to increase the valuation conclusion or justify a higher SBA loan amount.

What DSCR does the SBA look for?

Most SBA lenders target a DSCR of 1.15x or higher based on historical, normalized cash flow after all required adjustments.

Can the SBA finance a deal above the valuation amount?

No. The SBA will only finance up to the concluded fair market value, regardless of buyer strength or projected performance.